Chapter 22, THE PERSONAL INCOME TAX Video Solutions, Economics of the Public Sector

Problem 1

For each provision of the tax code listed below, which provides the best explanation: incentives, horizontal equity, vertical equity, administrative reasons, or special interest groups?
a Deductibility of mortgage interest
b Deductibility of casualty losses
c Deductibility of medical expenses
d Deductibility of charitable contributions
e Child care tax credit
f Credit on taxes paid to foreign governments
g Tuition tax credit/deduction
Which of these provisions can be justified as a response to a market failure? Compare this response-the use of the tax system-with alternative responses (such as direct government expenditures).

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Problem 2

Discuss the arguments for and against using a tax credit rather than a deduction for: medical expenses, charitable contributions, and child care expenses.

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Problem 3

If you were asked to write the regulations concerning the deductibility of business expenses, how would you treat the following items, and why? Discuss the inequities and inefficiencies associated with alternative possible rules.
a Educational expenses required to maintain one's current job
b Educational expenses incurred to obtain a better job
c Moving expenses arising from a reassignment by one's present employer
d Moving expenses incurred in obtaining a new job
e Business suit worn by an individual who does not wear suits except for business
f Business lunches costing more than $$\$ 25$$
g Expensive cars
h Commuting costs
i Car expenses of a traveling sales representative
j Subsidized cafeteria lunches

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Problem 4

Under the old tax law money that scientists received from winning the Nobel Prize (or similar prizes) was not taxable. Now it is. Which treatment do you think is appropriate? Under both the old and the new tax law, money received by lottery winners (as well as gambling receipts) is taxable. while the losses are not deductible. Is this fair? What distortions does this introduce?

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07:54

Problem 5

Consider a divorced individual who earns $$\$ 26,000$$, has two children, pays $$\$ 4800$$ in child care expenses, $$\$ 2000$$ in mortgage interest payments, and $$\$ 4500$$ in medical expenses. Medical expenses in excess of 7.5 perceni of one's income are deductible. When the individual's income is $$\$ 26,000$$ she gets a 22 percent child care expense credit; when her income is $$\$ 28,0,1$$ her credit is only 20 percent. Her base marginal tax rate is 15 percent. Wlat is her actual marginal tax rate?

Yi Chun Lin

Washington University in St Louis

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Problem 6

Explain why federal tuition tax credits might lead states to increase the tuition they charge. Many states currently charge a tuition in state community colleges that is substantially below $$\$ 1500$$, the level of the federal credit. What might one expect to happen in those states?

Lucas Finney

Numerade Educator

Problem 7

In the debate over the tuition tax credit, one administration economis: pointed out that in Georgia, which had provided these scholarships for it: students, tuition had not increased after the credit had been provided. Wiy might a federal tuition tax credit or deduction be expected to have a different impact than a credit or deduction provided by the state for state universities?

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